Holding

A loan to a landlord for construction of a lease‑back building is not a 'term loan' for commercial purposes and therefore the landlord is not liable to pay interest above 15% per annum nor quarterly rests.

Summary

The landlord obtained a loan from State Bank of Patiala to construct a building which he would lease back to the bank for its commercial use. The loan agreement stipulated a 16% interest rate with quarterly rests, which the landlord contested. The trial court reduced the rate to 15% and eliminated the quarterly rests, a decision affirmed by the district court. On appeal, the bank argued that the loan was a "term loan" and thus subject to RBI guidelines permitting quarterly rests. The Supreme Court examined RBI circulars of 1976, 1986, and 1991 and held that "term loan" refers only to loans for commercial purposes, not to loans advanced to landlords for construction of lease‑back premises. Consequently, the landlord is not liable to pay interest above 15% per annum nor to pay quarterly rests. The appeal was dismissed.

Issues considered

Whether a loan taken by a landlord for constructing a building to be leased back to the bank falls within the definition of a 'term loan' under RBI guidelines.
Whether the landlord is liable to pay interest at a rate higher than 15% per annum and quarterly rests as per the loan agreement.
Interpretation of RBI circulars dated 13 March 1976, 18 April 1991, and subsequent revisions concerning interest rates and quarterly rests on loans to landlords.

Subjects

term loaninterest ratequarterly restReserve Bank of India circularslease‑backbanking lawinterpretation of statutes

Judgment

STATE BANK OF PATIALA AND ANR. A
v.
HARBANS SINGH

FEBRUARY 14, 1994

[K. RAMASWAMY AND B.L. HANSARIA, JJ.) B

Banking Services-'Tenn Loan' for construction of building with a con-
dition to lease to the lending bank-Rate of interest-Also quarterly
-< rest-Directions by Reserve Bank of India-Held: Loan not for commercial
purpose-+Ience no quarterly rest pennissible-fnterest only at the rate of 15%. c
Words & Phrases: 'Tenn Loan'-Meaning of-In the context of Banking
services.

The respondent landlord obtained loan from the appellant bank and
constructed a building for the business of the appellant. The interest D
charged was 16% per annum with quarterly rests thereon. The respondent
+ filed a suit challenging the liability, and the trial court reduced the rate of
interest to ~5% per annum and also set aside the liability of quarterly rest.
On appeal, the same was confirmed. 'The second appeal preferred by the
bank having been dismissed in limine by the High Court, the bank E
preferred the present appeal.

On behalf of the appellants, it was contended that the word 'term
loan' would include not only the loan advanced for commercial pnrposes,
but also the loans advanced to landlords for construction of building to
lease back to the lending bank for their commercial purpose, which loan F
carried liability to pay interest at quarterly rest.

Dismissing the appeal, this Court

HELD: 1. In view of the directions by the Reserve Bank of India issued
to all banks on 18.4.1991 there is no liability of the landlord, who had talq:n G
loan for constructing the premises and leasing back to the bank for com-
mercial purpose, to pay interest at more than 15% and he need not pay
~
interest at quarterly rest. The letter of Reserve Bank dated March 13,1976
also indicates that the obligation to pay quarterly rest was not with refer-
ence to the loans taken by the landlords for construction of the premises but H
933
934 SUPREME COURT REPORTS [1994) 1 S.C.R.

A for commercial purpose. The word 'term loan' was used for the commercial
purpose and it did not include the loan advanced to the landlords for ........
construction of the buildings. 'Term loan' would mean the loan advanced
for commercial purposes and not the loans given to the landlords for
construction of the buildings to lease back for the use by the bank itself. It
was not so intended would be clear from para 1(ii) of the letter dated
B 18.4.1991 relied on by the bank. It would indicate that in respect to commer-
cial loans, they appear to ha\'e intended to charge quarterly rest. The
Reserve Bank at nowhere indicated that the term loans given to the
landlords for construction of the buildings to lease back to the commercial ")..
banks should be intended to be charged with interest with quarterly rest. On
c the other hand, they ha\'e reduced sufficiently from time to time even the
lending rate of interest in favour of landlords/lessors. [937-E-H; 938-A]

2. No doubt the Head Office while addressing the letter to the
Manager of the appellant bank had referred to the rate of interest at 15%
per annum plus interest tax with quarterly rest. But in the light of the
D direction given by the Reserve Bank which the commercial banks are bound
..._
to follow and the bank itself adopted that policy a reduced the rate of
interest, the liability to pay quarterly rest is obviously illegal. [938-B, C]

CIVIL APPELLATE ~RISDICTION: Civil Appeal No. 1690 of
1994.
E
From the Judgment and Order dated 28.5.93 of the Punjab &
Haryana in R.S.A. No. 1165 of 1993.

S.P. Goyal and Mrs. Amita Gupta for the Appellants. +
F M.S. Gujral and S.K. Bandopadhyay for the Respondent.

The following Order of the Court was delivered:

1. Leave granted. This appeal arises against the order of the High
Court of Punjab & Haryana in Second Appeal No. 1165/93 dated May 28,
G 1993 dismissing the appeal of the appellant in limine. The respondent is
the landlord who obtained loan from the appellant and constructed a
building for the business of the appellant in ground floor of the premises ~
bearing No. 55 at Tripurari Sadan, Patiala. The appellant charged interest
@ 16% per annum with quarterly rests thereon. Impugning the liability.
H the respondent laid the suit and the trial court reduced the rate of interest
r
STATE BANK OF PATIALA v. HARBANS SINGH 935

to 15% p.a. and also set aside the liability of quarterly rest. On appeal it A
was confirmed. As said earlier, the second appeal was d~smissed i!J limine.
Thus the appeal by special leave.

2. The contention of the appellants is that the respondent had
approached for a term loan for construction of the building with a condi-
tion to lease it out to the appellants. In the promissory note and the B
documents executed by the respondent, it was specifically agreed that the
term loan granted by the appellants would car_ry not only the interest at
the rate stipulated therein, but also quarterly rest. It is stated that the word
'term loan' would include not only the loan lent for commercial purposes
but also the loan advanced to construct the houses to lease back to the C
bank for their business purpose and the Courts below have, thei:efore,
committed illegality in reducing the liability of quarterly rest. Though we
have given sufficient time and adjourned the case from time to time to
produce all the records, the bank has not chosen to produce the records;
in particular, circular letter of Reserve Bank of India bearing DBOD No. D
+ DCDC 106/c 168(61-80) dated September 15,1980 on the subject of mini-
mum lending rates of interest in respect 0f advances to the landlords.
Therefore, we are constrained to proceed on the basis of the material
placed by the appellants and the respondent.

3. Shri Goel, learned senior counsel for the appellants, has strenuous- E
ly contended that the word 'term loan' would include not only the loan
advanced for commercial purpose, but also the loans advanced to the
+ landlords for construction of the building to lease back to the lending bank
for their commercial purpose, which loan carries liability to pay interest at
quarterly rest. ln the promissory note and the agreement executed by the F
respondent it was also mentioned that the liability on interest is also with
quarterly rest. He stated that in clause l(ii) of the letter (exhibit P-7, filed
by them on the paper book) addressed by the Reserve Bank of India,
Department of Banking Oper~'.tions to all the commercial banks on March
13, 1976 it was mentioned th<.t:
G
"l(ii) no scheduled c:)mmercial bank incorporated in India and
having aggregate dem<1:nd and time liabilities of Rs. 25 crores or
above but less than Rs. 50 crores as on the 12th March, 1976 or
at any time thereafter, shall charge interest on loans/advances/cash
credits/ overdrafts or any other financial accommodation made or H
936 SUPREME COURT REPORTS [1994) 1 S.C.R.

A provided by it or renewed by it, or discount usance bills a.t a rate,
in either case, higher than 17.50 per cent annum: interest shall be
charged with quarterly rests."

4. This clearly shows that landlord is liable to pay quarterly rest. But
when we see the letter DBOD No. DC.DC.42/c. 168(61)-81 dated 18th
B April 1991 addressed by· the Reserve Bank to all the commercial banks
including the regional rural banks. We find it was decided by the Reserve
Bank that the minimum lending rates of interest in respect of advances to
landlords/ lessors or premises for banks use, should be refined and the
same should be 15.0% in respect of such advances in urban/metropolitan
C centres. This letter does not mention about quarterly rest.

5. The appellant bank itself have stated that in the letter of the
Reserve Bank of India dated March 7, 1986 1t has been reiterated in
paragraph 2 that the matter regarding rates of interest to be charged by
the banks on advances granted to landlords for purpose of has been
D reviewed and it has been decided that such advances should be treated as
term loans and charged interest accordingly which was at that time 15% +
per annum. Even in the letter subsequently addressed by the Regional
Manager of the appellant bank on April 22, 1988 it was stated that:

"Please refer to your letter mentioned above and advice us the
E reasons for charging higher rate of interest @ 16% and 17.5%
whereas per loans and conditions settled with the landlord 15%
P.A. interest plus interest tax is to be charged."

When the ·respondent vide his letter dated April 16, 1988 had expressly
F protested not only charging the rate of interest at 16% P.A., but also
quarterly rest, the appellants bank specifically referred to this request of
.the respondent and pointed out that the aforesaid mistake was committed
by the authorities. The appellant bank in its latest circular No. Prem/Gen/8
of 1993-94 dated 29th October, 1993 have stated that the Reserve Bank of
India h~ve reduced the lending rates by one ·per cent point from 18%
G (Minimum) to 17% (minimum) from 17% (Minimum) to 16% (minimum)
and from 16% (minimum) and from 16% (Minimum) to 15% (minimum)
w.e.f. 1.3.93, 24.6.93 and 2.9.93 respectively. Consequent to the above
revision, the appellant bank itself decided to charge interest on terms loans
granted to landlords for purpose of acquisition of premises for Bank's use
H w.e.f. 1.3.93 to 23.6.93, 24.6.93 to 1.9.93 & 2.9.93 onwards as per the
STATEBANKOFPATIALA v. HARBANSSINGH 937

schedule mentioned as under: A
Effective Effective Effective Effective
interest rate interest rate interest rate interest rate
Size
prevalent from 1.3.93 from 24.6.93 w.e.f. 2.9.93
before 1.3.93 to 23.6.93 to 1.9.93 onwards
A. Upto & B
12.00 12.00
inclusive of
(11.50) (11.50)
Rs. 7500/-
B. Over Rs.
14.00 14.00 12.50 12.50
7500 & upto
Rs. 25,000/-
(13.50) (13.50) (12.00) (12.00) c
C. Over Rs.
15.50
25000/- & 17.25 17.25 16.50
Fixed
Upto Rs. (16.50) (16.50) (16.00)
(15.00)
2.00 lacs
+ D. Over Rs. 18.75 min. 17.75 min. 16.50 min. 15.50 min. D
2.00 lacs (18.00) min. (17.00) min. (16.00) min. (15.00) min.
(Figures given in brackets indicated interest rate without tax)
6. In the light of these intrinsic factual material, directions by the
Reserve Bank and circumstances, it is clear that there is no liability of the E
landlord, who had taken loan for constructing the premises and leasing
back to the bank for commercial purpose, to pay interest at more than 15';,;,
and he need not pay interest at quarterly rest. The letter of R.B.I. dated
+ March 13, 1976 also indicate that the obligation to pay quarterly rest was
not with reference to the loans taken by the landlords for construction of
the premises but for commercial purpose. The word term loan was used F
for commercial purpose and it did not include the loan advanced to the
landlords for construction of the buildings. Term loan would mean the loan
advanced for commercial purposes and not the loans given to the landlords
for construction of buildings to lease back for the use by the bank itself. It
was not so intended woul :l be clear from para l(ii) of the letter relied on G
by the bank (ex.p-7) as ex.'.racted earlier. It would indicate that in respect
of commercial loans, they appear to have intended to charge quarterly rest.
The Reserve Bank at nowhtre indicated that the term loans given to the
landlords for construction of the buildings to lease back to the commercial
H
938 SUPREME COURT REPORTS [1994) 1 S.C.R.

A banks should be intended to be charged with interest with quarterly rest.
On the other hand, they have reduced sufficiently from time to time even
the lending rate of interest in favour of landlords/lessors.

7. It is true, as contended by Shri Goel, learned senior counsel, that
the State Bank of Patiala, Head Office while addressing the letter to the
B Manager of the State Bank of Patiala at Tripurari Saidan, Patiala (Ann.
P-6) have referred to the rate of interest at 15% per annum plus interest
tax with quarterly rest. But in the light of the directions given by the
Reserve Bank which the commercial banks are bound to follow and the
bank itself adopted that policy and reduced the rate of interest, the liability
c to pay qu;irterly rest is obviously illegal. The trial court and the District
Court, therefore, are quite right in limiting the liability of the respondent
only to pay simple interest on the loan advanced by the bank at 15% p.a.
without quarterly rest. We do not find. any illegality warranting inter-
ference.

The appeal is accordingly dismissed. No costs.

G.N. Appeal dismissed.